“There would be nobody there to protect consumers except the lobbyists for the insurance companies,” Louisiana Insurance Commissioner James Donelon said. “That’s how federal regulation works.
He and others pointed to the financial collapse of AIG Inc. under federal regulation. AIG insurance companies under state regulation remained solvent.
It was never a question in my mind that AIG, including its state regulated insurance operations, were insolvent. Rather the qustion in my mind was exactly how ignorant the State insurance commissioners that parrotted that III talking point above were and the relative degree of their stupidity. Sadly for our friends in Louisiana I concluded the hands down dumbest insurance commish was Jim Donelon mainly because even Mississippi’s Mike Chaney had enough sense to not parrot Robert Hartwig’s talking points on AIG.
Today, even our State Insurance commissioners know better than to hold up AIG as a triumph of state regulation, especially after they allowed insurers to cook their books to gain regulatory capital, a topic we well covered back in the day:
We covered the changing of the solvency definition here, here, here, here, here, here and here. I’ll also note the State Insurance Commissioners were MIA on the Gen Re $500 million dollar sham reinsurance scandal involving AIG. Simply put these state commissioners are not equipped to regulate global insurance concerns.
So is the failure of state regulation over insurance complete? Remembr folks the reason we allowed state regulation and an anti trust exemption for insurers back in the day was so insurer solvency would be secured so that claims could be paid. Using the original criteria can we conclude Jim Donelon and Mike Chaney are failures along with 48 other state commishes per the latest from McClatchy DC’s analysis of AIG’s finances? You betcha as Greg Gordon explains:
At the peak of the 2008 financial crisis, then-Treasury Secretary Henry Paulson and top Federal Reserve officials told the nation that there was an urgent need for the government to lend $85 billion to the American International Group so the giant insurer’s temporary cash squeeze wouldn’t trigger global financial chaos.
Nearly two years later, taxpayers are on the hook for twice that amount, and it now appears that Paulson and senior Federal Reserve officials either plunged ahead without understanding AIG’s financial situation and the risks it posed to taxpayers — or were less than candid about one of the largest corporate bailouts in U.S. history.
Does anyone trust anything the government says these days? I know I don’t and AIG is exhibit A why as we continue:
AIG was at the epicenter of all the government bailouts of financial institutions in 2008, a company through which more than $90 billion in federal money flowed out the back door to some of the same Wall Street banks whose risky behavior fueled the crisis. Among the leading beneficiaries of the AIG bailout was investment banking giant Goldman Sachs, which Paulson headed until June 2006.
Explanations of the bailout from current and former top government officials have never fully jibed, fueling allegations that most of the money was always intended for Wall Street rather than Main Street.
Elizabeth Warren, the chairwoman of the Congressional Oversight Panel that’s tracking the use of bailout money, said at a hearing in late May that the government “broke all the rules” with its rescue of AIG, which she labeled a “corporate Frankenstein” that defied regulatory oversight.
The news just gets worse from here:
As the Fed wired billions of dollars to AIG in the fall of 2008, state and federal officials assured the public that the company’s financial woes were limited largely to its parent, which had wagered $2 trillion on exotic financial instruments and incurred massive losses on housing-related investments. AIG’s six dozen U.S.-based insurance companies, the regulators said, were all on solid footings.
A McClatchy analysis of the finances of 20 of AIG’s larger insurance subsidiaries at the time has found a much bleaker picture, however: More than $200 billion in potential red ink was obscured by entanglements in which these subsidiaries bought stock in, reinsured or guaranteed debts of their sister companies.
Despite the regulators’ public assurances and AIG’s assertion that pooling arrangements among its subsidiaries made the liabilities look worse than they actually were, AIG has since propped up its insurance subsidiaries with $31 billion of taxpayers’ dollars, and its total debt to taxpayers — once as much as $182 billion — still could reach $162.5 billion.
Now the company, nearly 80 percent owned by taxpayers, is reporting profits again and appears to have stabilized. Even before AIG’s planned $35.5 billion sale of a prized Asian insurance subsidiary collapsed on June 1, however, government auditors projected that bailing it out will still cost taxpayers as much as $47 billion.
Folks I’d much rather be wrong and not be on the hook for part of the $47 billion we don’t have that was thrown down this black hole. Unfortunately the joke is on Jimbo and his sidekick Mikey the Cook and the public is stuck with the bill.